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Subdued refining performance

About the stock: Hindustan Petroleum Corporation (HPCL) is one of India’s largest public sector refining & marketing companies.

* The company operates 18776 retail outlets

* Petrol & diesel together contribute more than 60% of total sales.

Q1FY22 Results: HPCL’s results were better than estimates on profitability front.

* Revenue was down 8.9% QoQ to | 77585.5 crore (estimate: | 86400.4 crore) as product sales fell 14% QoQ on account of second wave of Covid-19

* Reported GRMs were at US$3.3/bbl while throughput fell 42.8% QoQ to 2.5 MMT due to shutdown and low demand. Marketing performance must have been better than expected as per our understanding. Subsequently, EBITDA was at | 3193 crore, down 31.6% QoQ (estimate: | 3061 crore)

* PAT was at | 1795 crore, down 40.5% QoQ (estimate: | 1520.7 crore)

What should investors do?

Global product cracks continue to remain weak and volatile in the current market environment. HPCL’s refining performance was weak due to refinery shutdown and lower demand.

* We retain our HOLD rating on the stock

Target Price and Valuation: We value HPCL at | 265 i.e. average of P/BV multiple: | 311/share and P/E multiple: | 218/share

Key triggers for future price performance:

* Crude throughput to improve with Mumbai refinery getting commissioned and increase in fuel demand

* Recovery in global refining product cracks (mainly diesel)

* Pick-up in transport fuel demand with relaxations in lockdown and steady marketing margins

* Consistent dividend payout

Alternate Stock Idea: Apart from HPCL, in our oil & gas coverage we also like IOC.

* IOC with its pan-India presence offers exposure to steady pipeline business along with improving profitability in refining and petchem segments. It trades at relatively cheaper valuation compared to peers

* BUY with a target price of | 120

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